Shares of support services group Interserve (LSE: IRV) have risen by more than 35% since Wednesday, when the company published details of a refinancing agreement.
Interserve employs more than 25,000 people in the UK, where it manages the Ministry of Defence’s estate and is involved in healthcare and probation services. Yesterday’s deal appears to provide additional borrowing capacity for the group, along with extended repayment deadlines.
This looks promising
The Reading-based firm has agreed an extra £291.6m of borrowing facilities. These won’t mature until September 2021. Most of the group’s existing debt will also be restructured so that it isn’t due for repayment until that date.
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If the deal is approved, it will provide the company with total cash borrowing facilities of £834m,, subject to certain “step-downs” during that period. This compares to expected net debt of £513m at the end of 2017.
The group’s lenders will also be able to subscribe for new shares at 10p per share which, if taken up, will give them a 20% stake in the firm.
Although this deal suggests those lenders are keen to support a turnaround, yesterday’s statement didn’t include an update on current debt levels. This means that we don’t know how much of these new borrowing facilities will already be used up when they’re approved.
Nor do we know the full costs of this refinancing. Interserve said that pricing on existing debt has been renegotiated but didn’t specify the new interest rates. All we know is that interest payments in 2018 are expected to total £56m, of which £34m will be cash.
My view
Interserve hopes to reduce debt by cutting costs and selling parts of its business. But I think there’s still a risk that shareholders will be asked to provide extra cash.
If I was one of them, I’d probably hold on after Wednesday’s news. But I wouldn’t buy any more shares at this time.
Although the forecast P/E of 3 may seem tempting, it’s actually a reflection of the group’s high debt levels and distressed state. And while the firm’s lenders will probably make a profit from this situation, shareholders might not.
A 65% faller I’d buy
You might not think of temporary power provider Aggreko (LSE: AGK) as an outsourcing firm. But its business enables customers to outsource the supply of electricity by simply telling Aggreko what they need and paying the firm to provide it.
This business has suffered from weaker demand and bad debts over the last five years, during which the shares have lost 65% of their value. However, I believe conditions could soon start to improve.
Emerging market economies and the oil, gas and mining sectors all appear to be gaining strength. At some point I think this should generate additional demand for temporary power.
In the meantime, Aggreko’s performance seems to have stabilised. The recent 2017 results showed revenue rose by 4% to £1,730m last year. Excluding the impact of problematic legacy contracts in Argentina, revenue was 9% higher, with operating profit up 13%.
Debt looks comfortable to me and cash generation improved last year. The unchanged dividend of 27.1p was covered by free cash flow, excluding acquisitions.
Analysts expect earnings to be largely flat in 2018. With the shares trading on a forecast P/E of 13 and offering a 4% yield, I believe Aggreko could be a profitable turnaround buy.
